Arbitration agreements – is your dispute resolution clause enforceable?
Commercial contracts often provide mechanisms for parties to resolve disputes outside the orthodox court process. Parties will often include these alternative dispute resolution clauses for a range of reasons, but the underlying reasons usually include confidentiality concerns, cost or the need for expedient resolution of disputes.
One such mechanism for dispute resolution is for the parties to submit to arbitration through what is referred to as an ‘arbitrations clause’, which intends to solely refer the parties to arbitration for disputed matters. The drafting of such clauses is critical to determining whether the intended referral to arbitration will be enforceable.
In the recent case of Lin & Anor v Lee [2021] QSC 336 (Lin), Martin J clarified the use of dispute resolution clauses in commercial agreements to be classified as an ‘arbitration agreement’ in accordance with section 7 of the Commercial Arbitration Act 2013 (Qld) (the Act).
The Case
In Lin, the plaintiffs and defendant entered into a contract for the defendant to provide migratory services (the contract). The plaintiffs subsequently commenced proceedings against the defendant some years later for alleged negligence and breach of contract. The defendant applied for orders to stay the proceeding and refer the matter to arbitration in accordance with section 8 of the Act. The application was made on the basis that the dispute resolution clause in the contract constituted an arbitration agreement within the meaning of the Act.
Relevantly, section 7 of the Act defines an ‘arbitration agreement’, alongside other features, as follows:
‘An arbitration agreement is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.’
The relevant clause 11 in the contract, provided for the resolution of the dispute by a number of steps, including by clause 11(c) that (our emphasis):
‘If the parties cannot reach an agreement within 21 days, the parties agree to refer the dispute to the Australian Commercial Dispute Centre (ACDC) for final settlement by a single arbitrator appointed in accordance with the Rules of the ACDC, or by another dispute resolution process suggested by ACDC and accepted by the parties. It is expected that any fees payable to ACDC or to the person appointed by ACDC will be paid by the parties equally.’[1]
In assessing the clause, Martin J considered that the dispute resolution clause should be interpreted ‘by reference to the contractual text construed in light of its context and purpose’, in accordance with uncontroversial principles of commercial contractual construction.[2] Accordingly, his Honour noted that the clause did not represent an agreement between the parties that disputes were to be submitted to arbitration, rather it specified that disputes were to be referred for ‘final settlement by a single arbitrator’.[3]
In detailing his considerations, his Honour adopted the position set out in New South Wales Court of Appeal’s decision in Jemena Gas Networks (NSW) Ltd v AGL Energy Limited [2017] NSWCA 266 (Jemena). In Jemena, the court decided a clause would not be an arbitration agreement if it ‘merely identifies the possibility of arbitration without any express or implicit agreement to submit all disputes or any class of disputes to arbitration, as opposed to litigating’.[4] That is, any arbitration clause must be drafted with enough specificity to leave no doubt that the parties are to submit to an arbitration.
Key Factors
Relevantly, Martin J considered a number of key factors as to why this clause could not be defined as an ‘arbitration agreement’ per the Act, including:[5]
1 the clause did not require the parties submit to an arbitration, rather it required referral of the dispute for ‘final settlement by a single arbitrator’;
2 neither the clause nor the ACDC rules necessarily require a single arbitrator to engage in arbitration;
3 the clause contemplated other dispute settlement methods being agreed upon by the parties, rather than solely reliance on arbitration; and
4 the clause otherwise contemplated that the parties would be unable to resolve their differences through the ACDC, which is inconsistent with the ACDC rules.
Ultimately, Martin J dismissed the application for orders referring the matter to arbitration and staying the proceedings. This is because while the clause contemplated the possibility of arbitration, there was no express agreement to submit a dispute to arbitration.[6]
Commentary
When drafting commercial contracts, parties who wish to have any dispute heard by arbitration need to take particular care. That is, in order for parties to protect themselves – whether that is due to privacy concerns with litigation, expediency, or any other issues – careful consideration is required to ensure that the arbitration clause is enforceable in accordance with the Act.
If you are in the process of preparing or negotiating a contract, we can assist you to draft an arbitration agreement or provide advice if you are considering alternative dispute resolution, tailored to your specific requirements.
For further information contact our team.
[1] Lin v Lee [2021] QSC 336, [8].
[2] Lin v Lee [2021] QSC 336, [15].
[3] Lin v Lee [2021] QSC 336, [17].
[4] Lin v Lee [2021] QSC 336, [22] referring to Jemena Gas Networks (NSW) Ltd v AGL Energy Limited [2017] NSWCA 266, [27].
[5] Lin v Lee [2021] QSC 336, [20].
[6] Lin v Lee [2021] QSC 336, [23] – [24].
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.
